Exam 9: Prospective Analysis

When forecasting future cash flows, it is useful to perform "what if" analyses to determine the effect of various unexpected events in order to assess the company's financial flexibility.

Hiruit company's sales in December were $5,500. They expect sales to increase 10% in January and February and 15% in March. All of its sales are made on credit. The typical collection pattern is: Collections Percentage of total receivables In month of sale 10\% In second month 70\% In third month 15\% Not collectible 5\% Gross margin is 30%. Inventory levels at the end of December are $900 and are expected to grow at the same rate as sales. Purchases are paid for the month after they are made. Net accounts receivable at the end of December are $400. -Net account receivable at the end of March is closest to:

Prospective analysis can only be used to project an income statement, a balance sheet, and a statement of cash flows.

If a company takes longer to pay its suppliers than before, all other things being equal, this means that suppliers are providing more financing for the company.

Research shows that ROEs tend to revert to a long-run equilibrium after about 5 years.